Moon’s effort to increase minimum pay is his most controversial

Mr. Song, 54, runs a small billiards hall in Ulsan. Lately, he’s had to work more hours, not because his business is thriving, but because he had to let go of one of his two employees.

“I couldn’t afford him due to bad business recently,” Song said, “but what I’m more concerned about is I might have to let go of the remaining employee when the minimum wage goes up next year.

“In the worst-case scenario,” he said, “I just might have to completely close the business.”

Song’s concern is widespread among owners of small and medium-sized enterprises (SMEs) since President Moon Jae-in took office in May and announced an ambitious plan to raise the minimum wage to 10,000 won ($8.80) an hour by 2020, part of the liberal administration’s effort to resolve the country’s income inequality and boost domestic consumption.

Over the objection of SMEs and skepticism from academic circles, the Minimum Wage Commission in July said it would raise the minimum wage to 7,530 won next year, a more than 16 percent increase from the current 6,470 won. It will be the first time the minimum wage has increased by double digits in the past decade.

Overhauling Korea’s economy is another goal. The government hopes boosting the domestic service sector will cure the country of its high dependence on exports and the whim of trading partners’ unpredictable moves.

But many economists are concerned that a hasty and aggressive policy amendment could lead to serious side effects, hurting those who need the aid most and helping those already in advantageous positions. An estimated 3 trillion won that the government has pledged to SMEs to help soften the blow of a higher minimum wage is not enough, businesses say.

“There is low possibility that a wage increase will lead to a rise in demand in an open economy,” said Sung Tae-yoon, an economics professor at Yonsei University. “It might downgrade the country’s competitiveness. Raising wages is a short-term policy to boost the economy and should not be used if the aim is long-term growth.”

Higher wages, fewer jobs

In contrast to the rosy outlook that Moon Jae-in’s administration has painted with its policy proposals, small-business owners who are most affected by minimum wage policies say the raise threatens their livelihood and doubt the higher wage will help the overall economy.

Jeong Weon-seok, executive director of the Korea Federation of Micro Enterprise, which represents the country’s six million self-employed business owners, noted that these business owners are also big consumers.

“The wage hike is severely hurting their financial state, running them out of business and eventually leading to a nationwide drop in consumption,” he said. “It is a policy that is being pursued too radically and superficially without properly doing market research and hearing what it is actually like to work on site.”

In a survey conducted by the federation of 500 of its self-employed members, 87 percent said their revenue had dropped this year compared to last year. More than 60 percent said a higher minimum wage would make retaining their current workforce difficult. Asked if they would downsize when the minimum wage goes up, more than 68 percent said they were “highly likely” to do so.

Many economists argue that a rise in labor costs could result in the creation of fewer jobs.

“Those affected by the minimum wage are mostly concentrated in micro enterprises that have fewer than five employees,” said Heo Hee-young, a business administration professor at Korea Aerospace University. “In our labor market, where employment is highly rigid” - because many workers tend to stay at one company rather than move around - “raising the minimum wage is likely to lead to decline in employment.”

The number of businesses affected would not be marginal. According to Statistics Korea, 86 percent of companies have fewer than 10 employees as of 2014, and they generate about a third of the country’s gross domestic product. About 38 percent of the country’s workforce is in small businesses like franchises, restaurants, convenience stores and accommodations.

“Employers will not hire people,” warned Jeong at the Korea Federation of Micro Enterprise. “They will buy machines and automated systems instead.”

Bridging the income gap

According to a report released by the Korea Small Business Institute last month, the average monthly salary at a company with more than 500 employees was more than triple the average at a business with fewer than five workers. Based on purchasing power parity, those who work for big companies receive $6,048 a month, while their counterparts in smaller businesses receive $1,894 a month.

Comparably, in the United States and Japan, the gap between income earners at big and small companies is a magnitude of 1.3 and 1.6.

Kang Hoon-joong, a representative of the Federation of Korean Trade Unions, an umbrella labor group, said the current minimum wage is already insufficient to cover the expenses of people living by themselves, let alone a household with children.

Under the current minimum wage, a single person can make at least 1.3 million won a month, but the average household spends 1.7 million won, according to data from the Ministry of Health and Welfare.

One persistent problem is that many businesses pay their employees less than minimum wage. A Bank of Korea report from August found that 2.8 million workers were receiving less than 6,470 won an hour. The central bank estimates that number will increase to 3.1 million by the end of this year.

Business owners say the government ought to create regulations that ensure employers pay the minimum wage, rather than simply raising it without any other policies.

Beyond minimum wage

Moon Jae-in’s administration has also pushed to expand the type of payments that fall under the base salary to help increase the amount of money that workers take home.

In August, a Seoul court ruled that Kia Motors had to include bonuses and other payments as part of the base salary between August 2008 and October 2011. The base salary is used to calculate benefits like overtime and severance pay, and the automaker’s labor union had sued the company, claiming it undercompensated workers by using a lower base salary.

The Kia ruling could set a precedent for other cases. Over 100 companies across different industries are involved in similar lawsuits, and any ruling that forces them to increase their base salary would raise labor costs anywhere between 14.6 trillion and 21.9 trillion won ($13 billion to $19 billion), according to the Korea Labor Institute. The Korea Employers’ Federation projected labor costs could go up by as much as 38 trillion won.

Many companies have said that if costs become too high, they may move production outside of Korea. Kia has already decided to cut all overtime work to cope with losses from the suit, raising concerns that the company may be preparing to relocate soon.

“From the workers’ perspective, that could mean lower salaries and job reduction,” said Kim Joon-sung, an analyst at Meritz Securities.

Labor costs at some Korean companies are already steeper than at global rivals, while expenditure on research and development continues to fall behind. According to the Korea Automobile Manufacturers Association, the average annual salary at Korean automakers last year was 92.1 million won. By comparison, the average salary was 91 million won at Toyota Motor and 80.4 million won at Volkswagen.

Park Ki-seong, a professor of economics at Sungshin Women’s University, said the increased labor costs as a result of a higher base salary could drag down annual economic growth by 0.13 percentage points.

“The loss is not limited to just one year but will accrue in the next several years,” Park said. “Such loss is ‘deadweight loss’ that dissipates without benefiting anyone.”